Santander Consumer USA Holdings Inc.
Q1 2015 Earnings Call Transcript

Published: 28 Apr 2015

[Operator:]

Good morning and welcome to the Santander Consumer USA Holdings First Quarter 2015 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Kristina Carbonneau, from the SCUSA Investor Relations team. Kristina, the floor is yours.

[Kristina Carbonneau:]

Thanks, Lisa. Good morning everyone, and thank you for joining the call. On the call today we have Tom Dundon, Chairman and Chief Executive Officer; and Jason Kulas, President and Chief Financial Officer. Before we begin, as you are aware, certain statements made today such as projections for SCUSA’s future performance are forward-looking statements. Actual results could be materially different from those projected. SCUSA has no obligation to update the information presented on this call. For further information concerning factors that could cause these results to differ, please refer to our public SEC filings. Also on today’s call, our speakers’ will reference certain non-GAAP financial measures which we believe will provide useful information for investors. A reconciliation of those measures to U.S. GAAP is included in the earnings release issued today, April 28, 2015. For those of you listening to the webcast, there are few user-controlled slides to review as well as a full investor presentation on the Investor Relations website. Now I will turn the call over to Tom Dundon. Tom?

[Tom Dundon:]

Thanks. Good morning everyone. Today, I’ll discuss our first quarter highlights and ongoing strategic initiative. I’ll then turn the discussion over to Jason for a detailed review of the quarter’s results, then open up the call for questions. Our first quarter results are highlighted by strong earnings growth, positive credit performance, attractive returns and robust originations. During the quarter, SCUSA earned net income of $289 million or $0.81 per diluted common share compared to net income for the first quarter of 2014 of $81 million or $0.23 per diluted common share. After adjusting for non-recurring after-tax IPO related expenses, core net income during the same quarter last year totaled $157 million or $0.44 per diluted common share. This equates to core net income growth of 84% from the prior year quarter driving our return on average equity of 31.2% and return on average assets of 3.5%. Return levels this quarter were particularly strong due to continued positive trends and credit performance. Net finance receivables, loans and leases increased 7% quarter-over-quarter and 21% year-over-year, while our serviced for others platform grew 9% and 80% respectively. We have retained a significant amount of attractive assets over the past year. We've also demonstrated our ability to sell assets to third parties when appropriate and retain the servicing. We continue to optimize the mix of assets we keep on our books versus those we sell and service for others. Total originations this quarter were $7.4 billion compared to total originations of $6.1 billion in the fourth quarter. First quarter volumes are seasonally higher than last quarter due to tax season. Our volumes this quarter are also in line with first quarter 2014 originations. We believe our ability to originate the same amount of assets as a year ago even after tightening our loan structures and less profitable FICO bands as we did in Q2 2014 is a very positive outcome with respect to penetration rates and origination trends, as well as asset performance. We were successful in widening our application sources and gained incremental business through our relationship with Nissan Motor Acceptance Corp. I wanted to provide a brief update on this relationship this quarter as it has generated strong originations year-over-year. Q1 2015 volumes from this channel totaled $229 million, up from $12 million during the same period last year. We remain focused on our personal lending platform. Our personal lending portfolio balance as of March 31 totaled $1.8 billion flat versus the prior quarter due to revolving balances seasonally decreasing as expected following the holiday season. Personal lending originations grew 54% to $166 million from $108 million during the same quarter last year. Regarding our capital levels, SCUSA TCE to TA ratios continue to increase, totaling 10.8% as of first quarter end, up from 9.7% at the end of Q1 2014. We believe we’re more than adequately capitalized at this level. As we retain more capital, we are effectively deploying that capital into more profitable assets to increase shareholder value as demonstrated by the increase in our return on equity of 31.2% this quarter, up from core return on equity in the prior year quarter of 22.4%. Regarding regulatory matters it was recently announced that our parent company SCUSA did not pass CCAR on qualitative grounds. We’re committed to work closely with our parent company on fundamental improvements necessary in preparation of our parent company’s capital plan submission in 2016. We remain focused on further enhancing foundational processes related to risk-management, governance, and internal control which are critical components to this process. I’d like to turn the call over to Jason for a review of our financial results. Jason?

[Jason Kulas:]

Thank you, Tom, and good morning everyone. We’ve had a strong start to 2015, so let’s go into details a bit more. Net income for the quarter was $289 million, which represents core net income growth of 84% from the same quarter last year. Interest income from retail installment contracts increased 10% to $1.1 billion, up from $988 million during the same period last year. Interest income from personal loans grew to $112 million this quarter, up from $82 million during the same period last year. Additionally, fee income from this portfolio totaled $53 million this quarter. Including interest and fees, our total adjusted yield from this portfolio was 30.9% this quarter, up about 70 basis from the prior quarter due to a slight makeshift within installment loans. Net leased vehicle income increased to $60 million this quarter, up from $27 million in the first quarter of 2014, and flat versus last quarter. This quarter we sold $561 million in lease assets, which we will continue to service consistent with our other asset sale agreements. Moving to originations; as Tom mentioned, we originated $7.4 billion in loans and leases this quarter, including more than $2.5 billion in Chrysler retail loans, $1.2 billion of which were prime loans and the remaining $1.3 billion non-prime. We also originated $1.5 billion in Chrysler leases, which includes $404 million in leases originated for an affiliate. The Chrysler penetration rate as of March 31 was 30%, up from December's penetration rate of 27%. We continue to have positive news on the provisions front, as credit performance remains in line to marginally better than expectations. The provision for credit losses were $606 million this quarter, down from $699 million in the first quarter of 2014 and up from $560 million last quarter. The provision increase this quarter was driven by higher retained asset balances and a marginal mix shift toward non-prime and higher-margin assets both of which were accretive to long-term profitability. Additionally, this quarter month’s coverage was held flat versus a decrease in the prior quarter, which led to lower provisions in Q4. The allowance to loans ratio remained flat versus prior quarter at 11.5%. SCUSA net charge-off ratio for the quarter was 6.7%, down from 8.6% last quarter and slightly up from 6.4% during the same quarter last year. The delinquency liquidity ratio was 3.2% at the end of this quarter, down from 4.5% last quarter, and in line with 3.1% at the same time last year. The quarter-over-quarter decreases in both ratios follow normal seasonal patterns. We continue to see stability in performance as we maintain disciplined underwriting practices and strict ROA hurdles. Moving on to expenses; during the first quarter, our operating expenses increased 24% to $245 million from $199 million in core OpEx during the – our IPO quarter last year. The increase was primarily driven by strong managed asset growth and the related increase in headcount and a one-time charge unique to this quarter for a $9.4 million settlement with the Department of Justice related to alleged allegations of the Servicemembers Civil Relief Act. I think it’s important to note the majority of the accounts found objectionable by the DOJ involved repositions prior to 2012. Since 2012, we systemic controls to prevent improper repositions of vehicles including those contracted with SCRA eligible customers. Our efficiency ratio for the quarter was 18.9%, up from a core efficiency ratio of 16.9% in Q1 2014. Our expense ratio for the quarter was 2.2%, down from a core expense ratio of 2.4% in Q1 2014. We believe the expense ratio operating expense to leverage – to average managed assets is a better representation of our efficiency as we continue to build our service for others platform and we expect to focus more of our discussion on the expense ratio going forward. Turning now to liquidity; SCUSA demonstrated its ability to place assets across a broad investor base evidencing consistent access to liquidity during the first quarter, be the execution of $1.3 billion securitization from our SDART platform, a $712 million securitization from our relaunched DRIVE platform, $1.1 billion of advances on private term amortizing facilities, $919 million sales through our monthly flow programs, and a $561 million lease sale. We’re pleased to announce the relaunch of the DRIVE platform. SCUSA now has three active and distinct securitization programs in the market, allowing us to reach a deep investor base and further diversify our funding sources. DRIVE provides us with an efficient vehicle to fund assets that were historically funded via private facilities and warehouses. We retain the first loss position to DRIVE transactions and consolidate them onto our balance sheet just as we do in our SDART deals. During the quarter, our asset sales totaled $1.5 billion, driven by monthly flow programs and the remainder from the lease sale. Asset sales were up from last quarter's $1.1 billion as we continue to focus on our growth in our capital-light servicing business, while also optimizing capital allocation. During the first quarter, we also executed a bankruptcy sale of charged-off assets realizing $38 million in proceeds. It’s important to note that some of this impact is a pull forward of income that would have already hit the quarter. Our periodic bankruptcy sales provide an opportunity for SCUSA to realize cash flow earlier in the assets lifecycle, and focus our efforts on servicing receivables more core to our strategy, while developing a long-term relationship with the buyer for these BK assets. The portfolio of loans and leases service for others totaled $11.2 billion at quarter-end, up from $6.2 billion at the end of the first quarter 2014. Investment gains for the quarter, which are primarily comprised of gains on sale totaled $21 million, down from $36 million during the same quarter last year, which included a CCART securitization. Servicing fee income totaled $25 million for the quarter, up from $10 million in the first quarter of 2014. Due to our focus on the relaunch of the DRIVE platform and the lease sale this quarter, the potential CCART deal we mentioned on the last earnings call was pushed into Q2. CCART 2015 A closed on April 15 with an offering size of about $732 million, which will be reflected in the Q2 results. Notice that held for sale line at the end of this quarter is higher than usual at just over $1 billion and this was driven by those CCART assets. Additionally in April, we executed our second SDART transaction of the year totaling more than $1 billion. Before we begin Q&A, I’d like to turn the call back over to Tom. Tom?

[Tom Dundon:]

Thanks. So looking back over the first quarter, we continue to originate attractive assets and produce strong net income. The key theme for 2015 is our focus on retaining high margin nonprime paper while continuing to build a comprehensive consumer finance marketplace as evident by our asset sale efforts this year and the growth in our service for others platform. Replacement service assets with more than 150 investors, including pension funds, traditional and alternative asset managers, insurance, insurers, and nationally regulated depositories; we are determined to broaden our investor base to use our capital efficiently and to optimize our balance sheet as remain focused on selecting assets for retention or sale. Finally, we're approaching the close of our second successful year as Chrysler's preferred lender. Since its May 2013 launch to the end of Q1 2015, Chrysler Capital has originated approximately $21.7 billion in retail loans and $8 billion in leases and facilitated the origination of $2.8 billion in leases and dealer loans for an affiliate. As we move into year three of our 10-year agreement, we continue to partner with Chrysler to determine ways to enrich our relationship and we believe there is significant potential going forward. With that I’d like to open the call for questions. Operator?

[Operator:]

Hello, we will now open up the call for questions. [Operator Instructions] Your first question comes from the line of Cheryl Pate from Morgan Stanley. Your line is open.

[Cheryl Pate:]

Hi, good morning. Just a couple of questions. I wanted to first touch upon the personal lending space where we should continue to see a fairly decent shift away from revolving towards installments, which comes with a higher FICA. Well, I’m just wondering if you could help us think through, how we should be thinking about credit as the mix shifts over the course – continues to shift over the course of the year, and then secondly origination opportunity as lending club ramp up as well?

[Tom Dundon:]

Sure. So, I think the mix shift tends to be – we tend to make decisions on these things based on what we see in the market and what we think of the risk return profile of our opportunities. It seems like there is increased competition in that space. So it’d be hard to – it’d be hard to really predict the future in terms of where the mix shift will go. Credit seems to be performing fine, no real story, it’s sort of benign, but increased competition tends to lead the tighter margin, so even if the credit performs there may be less net interest margin in that business overall. So without looking at any particular part of the channel, we think there's a lot of opportunities for us and just making sure we pick the right ones.

[Cheryl Pate:]

And then as a follow-up, I just wanted to touch up credit more broadly within the auto channel. Just sort of when we – you’ve moved down half a month in terms of coverage and from what we can see credit trends do remain pretty benign across the credit spectrum. Can you maybe talk to some of the signposts to maybe thinking about moving that 16 and a half months down further over the next several quarters?

[Tom Dundon:]

Sure. So I think as we talked about last year, as we start to see, we watch the early payment rates and see early pressure and will tend to react to that, and in the last three or four months, our models had picked up on whatever losses we were seeing, and we’ve built some provisions and then as you started to see losses performing in line or better than our expectations as we’ve seen in the last few months that would be the reason that you stop growing provisions and/or take months coverage down as you start to continue to sort of beat model. So I think it's – we just got to keep watching the trends, obviously we’re most of the way through April, and I think that looks fine, and so if you keep seeing these trends then those are the decisions you have to make as a company and a management team, and it’s hard to predict the future, but the trends right now definitely look better than they did a year ago.

[Cheryl Pate:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of Eric Beardsley from Goldman Sachs. Your line is open.

[Eric Beardsley:]

Hi, thanks. Just on the provision again, can you just remind us how to think about your provisions for new originations, I think this quarter you are 8.1%, up from 7% you had mentioned that some of that was mix shift to less prime assets. Is that 8.1% reflective of the 16 month expectation or is that more of a one-year look?

[Jason Kulas:]

It is, it's reflective of the next – of the forward look that we see in our number of month’s coverage, and also reflective of that slight shift in mix we saw in the first quarter that we typically see where there is more demand for nonprime in the first quarter.

[Eric Beardsley:]

Got it. And could you just talk a little bit more about the competitive environment, what you're seeing in the used-car space and more in deeper prime?

[Tom Dundon:]

Sure. So we’ve been predicting used-car prices to come down in our models for a while and they’ve come down slightly. So in terms of – in terms of used-car prices, I think our expectation will be that those would come down a little bit over time and then competition, I think if you're asking just about other lenders there's been competition for quite a while, you get people coming in and out, maybe banks are a little softer and finance companies are a little harder – harder sometimes, but I don't think there's any – it seems rational and given some of the things that we think we’re pretty good at there is an environment where we can originate lots of loans within our risk – within our risk profile that we’re happy with right now.

[Eric Beardsley:]

Got it. So you feel like you’re hitting your 4% target pretax ROA right now?

[Tom Dundon:]

Absolutely.

[Eric Beardsley:]

Great, thank you.

[Operator:]

Your next question comes from the line of Mark DeVries from Barclays. Your line is open.

[Mark DeVries:]

Yeah, thanks. So, you know, the last 12 months you’ve reported diluted EPS of $2.73 per share, so the question is do you think you can grow earnings from here?

[Tom Dundon:]

We try not to get a lot in the guidance, but I think the portfolio can grow and we like our margins, and usually when those things happen, hopefully profits follow, but I think without speaking specifically to profits there's a lot of pieces that have come together the way they're supposed to or the way we try to manage them to.

[Jason Kulas:]

We also talked last quarter about the combination of ways we can create shareholder value, and so part of that is through continued earnings growth, and I think Tom summarized that well, and part of that is through some of these other businesses we’re focused on that we think over time reflect higher value, if you look at service for others and what we’re doing on the personal lending side.

[Mark DeVries:]

Okay, got it, and just one more. Did you include the $9.35 million legal charge in the P&L this quarter?

[Jason Kulas:]

We did, yes. So that’s why we mentioned in the opening remarks that it was unique to this quarter because it would be a one-time expense.

[Mark DeVries:]

Okay, got it. Alright, thanks.

[Operator:]

The next question comes from the line of John Hecht from Jefferies. Your line is open.

[John Hecht:]

Morning, thanks very much. Tom, you did – you already talked about your expectations for recovery rates, but the recovery rates were really strong in the most recent quarter. Is there something seasonal there? Was there some, I guess repo inventory withheld, and how should we think about the progression of that over the course of the year?

[Tom Dundon:]

I mean I think there is always, used cars tend to be stronger during tax seasons where there is more subprime activity, and they seem to be hanging in fine right now, and we don't hold, we all time repossessions nor do we time sales. We have a process and we run models and scores and we tend to – we tend to get the car at the appropriate time and sell the car as soon as possible, and we all tend to think about whether or not it's a good time to sell it because we know we're going to have more tomorrow, so that wouldn't play in the way we would manage the business. Our philosophy would be to get the car, sell the car and keep doing that every day.

[John Hecht:]

Okay. And then with respect to credit, it sounds like you’re – there's a lot more visibility now in terms of expectations and modeling and originations and so forth. The stabilization is that you just sort of bore through some of the issues you had in kind of the middle cust with 2013 or is 2014 vintage actually performing kind of better than expected at the time?

[Jason Kulas:]

I would say that you came out of this time where there was very little competitions and borrowers were making different type decision in terms of taking on debt and those things generated loan performance that was historical in terms of the quality and the payment rates, and the models pick those things up and it just took some time for the models to adjust to sort of that reversion to the mean. I think, hopefully everybody remembers, last year we were never worried about credit performance it was the fact that it was moving back towards a rational level where capitals attracted to returns that are higher than market would allow in a long period of time, and so I think now as we react the way we’re supposed to in terms of tweaking around the edges of some of our offerings along with other competitors recognizing that loss rates are getting back to normal and maybe that took a little while for some folks, as I think the combination of those things just meant that the model – the models might've started to predict a slightly higher level of losses given those factors, and now we’re probably coming in sort of at or below model for recent originations and the older originations are performing within the updated model also, and so those trends have seem to have stabilized for us.

[John Hecht:]

Okay, great. Thank you for the commentary.

[Operator:]

Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is open.

[Moshe Orenbuch:]

Guys you had, in nine months or so ago talked about kind of constraining the balance sheet, and building that serviced for others, and seems like you're able to do still build that service for others with kind of a double digit balance sheet growth, is that what we should be looking at for in terms of the balance sheet over the next year?

[Tom Dundon:]

I think in general we want to make good decisions with our capital and obviously we’re building capital at a pretty decent rate right now. And when you have capital and opportunity at the same time that’s a good position to be in, but as I think we keep saying we’re going to make the best risk return decisions, so we may decide to originate assets and depending on the price we get sell them and service them. If we think that's the best decision or we might keep more assets, I think that the managed portfolio clearly will grow than the mix and what we decide to keep versus service that decision – that’s a daily analysis we do and we’re trying to optimize our choices. We want to broaden our choices, so we can make the optimal result, and clearly having more capital SKUs – SKUs the model of that, right. So the more capital we generate, the more earnings we make, and the more restricted our abilities are to do things, exciting things with our capital then you sort of got to do the standard things with it.

[Moshe Orenbuch:]

Just as a kind of completely different thing. You may have said this thing, and I missed it, so I apologize, but the bankruptcy sale, does that impact charge-offs, the net charge-offs is that a reduction or a recovery?

[Tom Dundon:]

That is the recovery. It’s sort of a pull, it’s really a pull forward of some recovery.

[Moshe Orenbuch:]

Got it.

[Jason Kulas:]

So of that would've already hit the quarter as well, so some of those recoveries would have already come in the first quarter.

[Operator:]

Your next question comes from the line of Matthew Howlett from UBS. Your line is open.

[Matthew Howlett:]

Hey guys thanks for taking my question. Just getting back to the credit and ROE, Tom. I mean, really since you’ve been public, we’ve just been inundated with media reports on this pending subprime auto lending bubble, since you went on the road. But [indiscernible] wasn't going to have the ROEs that we’ve seen in prior years. And I know you don't really look at your book by vintages, but this boom bust sort of, you know stigma that's attached by the media, is it more rational now, I think you alluded to the pricing powers returning you guys have pricing power and ROEs will work their way up, we don't really go to this bust cycle where – where there is sort of distress in the industry?

[Tom Dundon:]

You know, unfortunately if the media write something for some reason, it probably gets taken because it's written down, may be more seriously than the facts would lead me to believe on the subject. We’ve been doing this for almost 20 years, been owned by Santander since 2006, we've made money on all of our vintages even through the recession, we think we have a pretty good handle on how these vintages perform and some are better and some are worse, but they're all profitable. And they’re – I couldn't think of a term that I would be less likely to use than do more bust for the way we look at our business right there, there is some significant amount of controls around how we originate and price these assets and because we have five years of loans that have a two to two-and-a-half year average life, we have vintages at different aging points, and so it's really hard to change the outcome on a three-year-old vintage, which is some percentage of our balance sheet. And if losses start to increase as we did last year, we’ll tighten credit and take margin. And so we have this what I consider a pretty good hedging environment given the short life of our assets in the age of the portfolio. So boom or bust is I know it's sort of easy to paint subprime auto similar to the way subprime mortgage works, but there's just not many similarities. We know the assets are going to depreciate and we've got a book of loans that has different aging points and has very different potential outcomes and if the potential outcomes start to get stressed then the new loans we do, we are able to take more margin and more yield and make up for some of the losses in the back book, so there is no boom and there's no bust because the market won't let you have a boom because it's too competitive, and we’re too good to have a bust. So that's how we look at it.

[Matthew Howlett:]

Yeah, we’re seeing that in the data. I mean, the industry is still highly fragmented, but all these small little issuers, originators out there, I mean are you seeing consolidation among them, I mean their raising price? You said they’re starting to see losses and maybe the asset markets aren’t as friendly, the wholesale markets aren’t as friendly to them, that’s all positive for you, right, as you see that move on?

[Tom Dundon:]

Sure, I mean I think once again these people that entered into the ark to compete with us, I think it looked easy in 2008, 2009, 2010 and 2011 where there wasn’t a lot of liquidity and the margins were big enough that you could come into this space and feel like there's a pretty good opportunity and that window closed in 2013, and it closed quickly. And so now, I think people's models have been updated as we mentioned earlier and there's probably a real understanding across the market of how you’ve got to price this risk and the controls you have to have in place to compete. And I think we’ve talked about in the past that we’re willing to price this risk at a place where it’d be very difficult for someone that didn't have significant sophistication and scale to compete in a big way. So we're were willing to keep the margins in a place to make sure that, a, we take care of our dealers and specifically Chrysler and give them the best risk return price and still maintain our profitability, and that's – that opportunity exists right now for sure.

[Matthew Howlett:]

Great, thanks. And just real quickly on the service for others, we haven't from an auto lender like yourself; we’re still kind of get a handle on the growth and the servicing fee, the managed assets as opposed to the owned assets. I mean, how do we, are you using your technology, is it going to continue to grow at this rate? I mean, how can we really start to model that and value that; that piece of your business that seems to be overlooked by so many?

[Tom Dundon:]

I’m not, I’ve tried to stay away from what we’re worth and how we value things, but I think the way we look at it is because we’re very efficient and the market is efficient for liquidity, we have an opportunity to originate assets that other folks really like that they probably, we can arbitrage our sophistication and efficiency, and make a little bit of money and still have a competitive price in the market. But it's not – obviously, it’s not a huge margin business, right, it's a business where we make something off of our scale. So I'm not sure how to guide anyone on valuing it, I think what we know is we’re efficient, we know how to originate this stuff, there is a lot of people that want it, and that we have the opportunity to keep growing it, and where those – where those margins end up, it's sort of a volume versus margin continuum and I would say that over time we’ll lean more towards the volume and make sure we can service Chrysler and servicer our dealers we would lean towards that over margins.

[Matthew Howlett:]

Great. Thanks Tom.

[Operator:]

Your next question comes from the line of J.R. Bizzell from Stephens. Your line is open.

[J.R. Bizzell:]

Good morning. Thanks for taking my call and impressive quarter. Most of my questions have been asked, but Tom kind of, you said you referenced kind of taking care of the dealer in the last comment and just thinking about the Chrysler Capital, you saw a nice tick up in penetration rate at something that’s been steadily growing over time, and just kind of give us a – how are you all thinking about that and what are the levers that are being pulled that continue to grow this relationship. Is it just pure maturation of your relationship with these dealers, and just give us an idea on that?

[Tom Dundon:]

Sure, our history obviously with subprime, and I think entering into this relationship we had some ideas on how to help them sell more cars and that was the easy part. The hard part was sort of learning the more captive like approach to how to take care of your dealers and how to train your salespeople and your credit buyers and your collectors and how to talk to the customers, and then working with the OEM to maximize whatever monies they are going to contribute to help sell more cars or push people towards the captive financing. And I would – I think unfortunately the truth is it was harder and took longer than we thought, and it does feel like you know which it seems like you noticed that we’re starting to make some real traction here, and I think we’re pretty optimistic about our ability to become a captive like or a captive that the dealers can count on and that you'll start seeing more share over time. I mean, that's what it looks like to us right now and the relationship with Chrysler is really good. And we’ve tried to make sure that we move our business practices in our training methodology in the way we run our business to fit like some of the other captives that have done a really good job historically for their OEMs, And it was a learning curve, and I think we’re much closer to where we want to be in terms of execution.

[J.R. Bizzell:]

Were you able to take your learnings there and that Nissan growth was pretty impressive this quarter. So is that something that we should think about continuing there, Nissan as well and you’re kind of hitting your strive with just learning the process and should we expect both of these to kind of continue to take up over time?

[Tom Dundon:]

That always the plan, right. So we’re – hopefully we’re learning every day, but yes I think, I think as it relates to our ability to service our dealers, coming into a time where things have stabilized in the last year compared to – relative to our expectations, it makes it a lot easy to focus on the little things you can do to help them sell more cars than when you're making sure that you’ve got credit right, so when credit feels stable, there's obviously more resources available to maximize these relationships.

[J.R. Bizzell:]

Great, and then last one from one, and switching gears. I know you all were referencing kind of the ABS market early in the presentation, but can you kind of give us a sense if the ABS demand, is the discount rate, is everything that’s kind of going on in that market, are you comfortable with, is it kind of add expectations, and you think it'll be pretty comfortable moving throughout 2015?

[Tom Dundon:]

I think we’re one of the leaders in that market and it looks really good for us right now, and I think we'll always tend to get the most volume and really good pricing relative to the market, but – so yes right now everything’s business as usual there.

[J.R. Bizzell:]

Great. Thanks for taking my questions.

[Tom Dundon:]

Sure.

[Operator:]

Your next question comes from the line of Chris Donat from Sandler O'Neill. Your line is open.

[Chris Donat:]

Hi, thanks for taking my questions here. Wanted to ask about expenses, can you give some commentary around where we are in terms of some of the build and expenses you had in 2014 to respond to some regulatory pressures and is this 2.2% expense ratio, is that – you think about going forward, so basically you're – the dollar value of expenses will grow with average assets.

[Tom Dundon:]

I think, in this regulatory world we live in and our embracing of moving our risk management and governance control processes to a more mature place, I think we're really good at risk management. But the way we have done it maybe doesn't align with all the regulatory expectations, so that shift cost money and you’ve probably seen some of that buildup and there's probably a little bit more to go, but I don't think it's – I don't think it's a huge driver either way, and then clearly as the managed assets grow – I think the managed assets should be able to grow at a greater rate than we would grow our expenses, and therefore I think the ratios as they sit probably look okay. And I don't think there's a big story on expenses for us either way right now.

[Jason Kulas:]

Yeah, I think what you'll see is, we should, as Tom said, we should see continued efficiencies as we look at that expense ratio and continue to grow the managed book, but there will be marginal improvements, and maybe slightly offset within the numbers by some additional growth and in some the oversight areas and those kinds of things, but the expense base is so large that it really gets lost in the mix and the net result will be an increase in efficiency as measured by that expenses over managed assets ratio.

[Chris Donat:]

That helps me there. And then from a modeling perspective, I know getting to the right number on a investments gains is always going to be tricky, but can you give us a little commentary around with your three securitization platform sort of what kind of cadence, you might be targeting or expecting going forward, just in terms of – don't see sort of lumpier gains. And I know it’s hard to predict going forward, but just looking for a little, your thought process on it.

[Jason Kulas:]

We only have gains on the CCART deals because that’s the only deal we’re not retaining the first loss or equity position in. And the timing of those deals is really driven by a lot of factors. So obviously we have pays of originations of those types of assets that’s an average, close to around average 700 FICO platform. So it's an upper tier platform for us. So we’re looking at originations, we’re also looking at other floor arrangements that we have with other banks and the pace at which they're buying, and what's available to sort of distribute to all these different sources. Our goal is diversity, but also our goal is to be active in all the markets where we are. I think our investors count on us to be there and be active issuers, and so it's a combination of all those things and we tend to issue when we have paper to issue and that's why you saw us go out again and close the deal on April 15.

[Chris Donat:]

Okay. That helps me. Thanks.

[Jason Kulas:]

Sure.

[Operator:]

Your next question comes from the line of David Scharf from JMP Securities. Your line is open.

[David Scharf:]

Hi, good morning. All of my questions have pretty much been addressed. I did want to just understand a little more on the BK sale and the impact on recoveries. In terms of how much of future recoveries that pull forward, relative to the 6.1% loss rate on auto this quarter, can you give us a sense without that portion of $38 million where they would be?

[Jason Kulas:]

Yeah, I can give you a big picture sense of that. The way to think about that is, there is a portion of it that would've already hit the quarter and there is also a portion of it that was related to assets that were accounted for under SOP 03-3. So if you look at the portion of that, there was truly a pull forward from future periods. It's probably half to less than half of it, is the way to think about it.

[David Scharf:]

Okay, got it. And just in terms of going forward is this going to – was this considered more of a one-off transaction or are there one or two buyers out there of auto deficiencies that are going to translate in a more regular flow of these types of transactions?

[Jason Kulas:]

There is a pretty healthy market for buyers for these types of assets. We've done these kinds of sales from time to time. We do expect to continue to do them, and we have actually signed a forward flow agreement for – with one particular buyer with that – with future sales.

[David Scharf:]

Okay. So is the expectation going forward probably this magnitude of size for the next 12 months that are now – the flow deal is?

[Jason Kulas:]

Yeah, and the size is really difficult to predict because that’s going to depend on the inventory, in this case bankruptcy assets, and so it's really difficult to say size, but you can expect to see more of those kinds of things from us.

[David Scharf:]

Okay. Got it, that’s helpful. Thanks.

[Jason Kulas:]

Sure.

[Operator:]

Your next question comes from the line of Rick Shane from JP Morgan. Your line is open.

[Rick Shane:]

Thanks guys for taking my question. I just want to circle back on Moshe’s capital questions and growth. Last year I think there was a proceed nexus between the CCAR process and slower loan growth, deleveraging and the transition to some of the asset light business models. What we saw in the first quarter this year was a real slowdown and the deleveraging starting to build the balance sheet again, and Tom you talked about how you will make these decisions, is somewhat tactical in terms of what opportunities are available in the market. I'm curious if tactically it were available is deleveraging essentially done, could you decide to grow the balance sheet at this point consistent with the growth of retained capital?

[Tom Dundon:]

Yeah, I think that's obviously what we debate all the time. But there's no reason we couldn't, it's just, once again, just trying to make the best decision we’re not, we don't set out trying to grow, we are simply trying to make a good risk return decision, the opportunities afforded to us right now are putting us in a position where we could choose because we have the capital, we have the liquidity and we have the opportunities to book the loans that we could choose to keep a little bit more assets on our balance sheet. I don't think we’re trying to – we don't have an end goal or a target as much as just keep making good decisions, and as you mentioned it looks like there was a little bit growth recently, and it seems to be continuing now, but it's not growth for growth sake and it's not a – I don't think it's a huge number, but on the margin it definitely feels like we have capital liquidity and assets available to put on our balance sheet, that’s what we’re in business to do.

[Rick Shane:]

Got it. Okay, that’s helpful. Second question and it is unrelated I apologize, but it is clear from your comments that there was a breakpoint in terms of vintages or sub vintages where you were below hurdle rate and now you're back to hurdle rate on your newer pulls, where do you think that transition occur?

[Tom Dundon:]

Yeah, I mean I think what – the truth about what happens is it’s depending on how small the vintage is, is it vintage a quarter, is it vintage a month, it tends to jump around a little bit based on mix and timing and year-on year-on-year, but I think somewhere in the third or fourth quarter of last year it started to, you know I think we talked about how we dropped originations a little bit and tightened up and put in some new techniques that we thought could help us, but I don't think there's any definitive point in time. I think the models just catch up to your performance, and hopefully you make some business decisions based on what you're seeing, and then over time the combination of your model catching up and some pricing pressure and some better risk decisions on the margin all those things give you a better result. But there wasn't some magic day where all of a sudden we threw a party and thought we had it all figured out, it’s just as an ongoing process.

[Rick Shane:]

Got it, okay. If I can get away with one last question for Jason. When we think about – one of the challenges here is that you were making loans with finite profitability, but you don't really – you don’t fully know that number until the loan pays off. So the accounting along the ways is an approximation. I am curious if those pools of loans that were below hurdle rate or below target rate because of the accounting are likely to deliver substantially higher ROAs than that lifetime ROA for the remainder of their life?

[Jason Kulas:]

I think it’s fair to say. We talk about this all the time, there is a difference between the timing of cash and gap and the way we provision upfront for loans and how that works. I think we should benefit from the fact that we saw some performance that was worse than we expected early on and some of those vintages that we talked about, and we did some upfront provisioning on those, and then since then the overall markets have been pretty stable. So we could see some upside from what our initial expectations of loss might have been on those pools when we were building provision for them. For the more recently originated vintages, clearly this performance that’s in line to slightly better than expectations depending on which we’re talking about is going to be a really positive thing too because our target returns are healthy returns, and we appear – early returns, but appear to be on track to achieve those returns on the more recently originated vintage.

[Rick Shane:]

Great. I apologize for taking so many questions, but appreciate the answers. Thank you guys.

[Jason Kulas:]

Sure.

[Operator:]

Your next question comes from the line of David Ho from Deutsche Bank. Your line is open.

[David Ho:]

Hi, good morning. We’ve heard a lot about alternative data sources and just improving algorithms, certainly than the online and marketplace lenders and technology really drives your engine on the credit side. Have you seen any improvements or opportunities to improve the decision-making and also the data – using data to make better credit decisions certainly over the past few months or maybe a couple of years?

[Tom Dundon:]

Yeah, I would say we've been doing this for a long time and we’re consistently testing different data sources, but there hasn't been any new big change in a long time. There's more data every day, but at some point there is a pretty big diminishing return, so trying to characterize my emotions when I see these stories. It’s really well very overblown the impact of some of these tools, if you're already using them. S if you're not, sure it's great, but I would say us and most people that look like us are – have been and will continue to use that data to make informed credit risk decisions and some of the new – some of the new things out there in the press aren’t new at all.

[David Ho:]

That’s helpful. And separately, as you continue to build out your track record with Chrysler and certainly expanding in some newer OEMs like Nissan, do you have additional things in the pipeline as it relates to new OEMs and maybe additional flow agreements, as you’ve gotten more traction certainly within the marketplace?

[Tom Dundon:]

Yeah, I think anything we would do it have to fit within our existing business lines. So the way we would look at any kind of partnerships would be business that we get today that we can enhance with some of these partnerships like what we’re doing with Nissan and [indiscernible]. We work on this all the time, and so yeah, there are plenty of opportunities right now, probably more opportunities than we would ultimately take on. So we're – as we talked about, we have some constraints, and we’re going to live within all those constraints, but I think the least of our concerns in terms of constraints right now would be partners to do business with, I think that's something that we have a pretty good pretty good opportunities in front of us than it’s just making the best decisions and picking the right partners and making sure it fits within our existing business.

[David Ho:]

And then lastly on the unsecured lending, those 10% of loans still sound about right in this environment as a target over time?

[Tom Dundon:]

Sure. I think it is reasonable. And I’m sorry I keep repeating myself, but I think we’re going to focus on the place where we get the best risk adjusted margin and that's an estimate, and it seems reasonable right now, but the market is pretty dynamic and we’ll be paying close attention.

[David Ho:]

Great. Thanks a lot guys.

[Operator:]

Our last question comes from Charles Nabhan from Wells Fargo. Your line is open.

[Charles Nabhan:]

Hey guys, most of my questions have been asked. But I was wondering if you could comment on Texas exposure. It might be a little early in the game to comment on the ultimate outcome of lower energy prices, but are you seeing anything different from a demand and a credit standpoint, and had there been any changes to the way you think about that geographic exposure?

[Tom Dundon:]

Not really. We have a very small sort of commercial business that – I think it's a couple hundred million dollars of prime that maybe has some percentage of trucks in it that, you know, you got to talk about. It’s good risk management to talk about. But in general there's not a lot going on here if you take into account, you get the benefit of lower gas prices and energy prices in the whole portfolio relative to the people who specifically work in oilfield services, it’s just not a huge story for us. So I'm not sure there's much to do there.

[Jason Kulas:]

I was just going to add. I was just going to add, when you look at delinquency by state, it doesn't stick out, so the current trends, Tom talked about sort of the look forward as well, but the current trends we’re seeing don't really stick out to us.

[Charles Nabhan:]

Okay. And as a follow-up. Your returns are obviously a function of a number of macroeconomic factors. I was wondering if you could comment – and if there's any specific indicators you're seeing as tailwinds and conversely if there's anything out there in the environment be it wage growth, non-farm payroll growth that concerns you at this point, as we go through 2015?

[Tom Dundon:]

I’m probably the wrong person to ask because everything concerns me all the time. So I don't don’t think there's anything very abnormal about this environment right now, it actually seems relatively stable from competition to liquidity to the economic environment, but there is not a – there's – I think we keep saying, we don't get to up or down, if used car prices are high or low or competition is high or low, or losses are high or low because it just gets adjusted. And one maybe data point to make this easier is we bought a bunch of portfolios back in 2008 and 2009 when everyone thought the world was ending and all those portfolios all paid back, I shouldn’t say all, but for the most part they paid back at least par even though we bought them at a discount and that was about as bad as it could ever be. So we made 20, 30 transactions where we were acquiring loans at a discount from people who thought that the economic environment was just not very good for this product, and it turned out that it wasn't that bad, and so we’re not, we’re probably not nearly as macroeconomic sensitive as some folks might want us to be just because we think that sort of takes care of itself given the short life of the asset and our ability to re-price the risk every day. So there – I would – long way of saying there's nothing – there's nothing too terribly scary right now, other than we’ve got a lot of work to do to continue to build out our risk governance framework to meet the increasing scrutiny and regulatory expectations that we all live in and we’re prepared to do it, but that's probably the thing outside of what we've got a good track record of doing, that’s the only thing that’s may be different that we’ve got to continue to overcome.

[Charles Nabhan:]

Great. Thanks for the color guys, I appreciate it.

[Tom Dundon:]

Great. Thanks everybody. Thanks for joining the call and your interest, and our investor relations team will be available for follow-up questions, and we’ll talk to you next quarter. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.